Five of the biggest passive fund managers – Amundi, BlackRock, DWS, Legal & General Investment Management (LGIM) and UBS AM – are “turning a blind eye” to the climate impact of their passive investments, according to an analysis from Reclaim Finance.
With the number of passively managed investments growing, Reclaim Finance examined 430 ‘sustainable’ passive funds managed by the five biggest asset managers in Europe and the US, and found that 70% were exposed to companies developing new fossil fuel projects.
The funds are invested in many of the largest oil companies as well as coal developers. For example, the BlackRock ACS World ESG Equity Tracker fund holds $499m in fossil fuel developers, including ExxonMobil, Shell and Chevron. By 2030, business as usual will mean this fund will overshoot a net-zero emissions pathway by 39%.
While some asset managers have policies that commit to restricting new investments in fossil fuels (most often for coal), few apply these policies to their passive investments and therefore also make misleading ‘sustainability’ claims. As a result, Reclaim Finance said asset managers are greenwashing in their passive funds.
“Asset managers are fuelling the climate crisis with their so-called ‘sustainable’ passive funds. While they are marketed as sustainable, these passive funds are invested in companies that are expanding fossil fuel production,” said Lara Cuvelier, sustainable investment campaigner at Reclaim Finance.
“Even asset managers which claim to have climate policies are part of the problem as most don’t apply their policies to passive funds. It is time for institutional investors and regulators to wake up and take action to stop these misleading claims.”
‘Significant flaws’ in sustainable indexes
The research also highlights how asset managers are relying on ‘sustainable’ indexes to identify investments for passive funds, even though these indexes do not exclude fossil fuel developers.
Analysis of the index methodologies used for 25 of the ‘sustainable’ funds found that they contain “significant flaws” and are not based on scientific criteria when it comes to greenhouse gas emissions. Asset managers “could be more selective and more active in solving this problem”, according to the report, with Amundi and DWS increasingly recognising that they can and should engage index providers on index changes if they want to comply with their net-zero commitments.
For Reclaim Finance, it is part of the role of asset managers to participate in actively setting the standards for what should and should not be in an index. As their biggest funds seem to be using a limited number of index providers, asset managers could focus their efforts on a limited number of firms and achieve a significant impact. For example, 18 of the 25 indices they analysed are provided by MSCI. While not all MSCI indices use the same criteria, it nonetheless highlights the importance of the methodological choices made by index providers.
In the report, Robin Braun, senior business manager for responsible investment at DWS Group, said that engaging with index providers is “an option we still have”.
“DWS plans to work with index providers in the coming years to see whether they can alter the composition of their indices to be, for example, more in line with a Net Zero pathway. Such discussions will be an important part of DWS’ shift to net zero.”
Priority measures and actions
As part of the report, Reclaim Finance suggested a series of priority measures urging regulators to act on the misleading use of sustainable claims for funds. This includes voting against the re-election of board members at companies involved in fossil fuel development, engaging with other asset managers to ask index providers to identify and exclude fossil fuel laggards from all ‘sustainable’ and mainstream indices, and offering incentives for asset owners to switch to cleaner funds.
Other financial stakeholders should also be ready to step in to tackle and prevent greenwashing, according to Reclaim Finance. Members of the Net Zero Asset Owner Alliance are urged to push asset managers to adopt new rules for their passive funds to ensure their assets are not being put into funds that support fossil fuel expansion, while regulators should establish a clear definition of greenwashing and set up systematic controls and sanctions based on it.
Response
Responding to the report, a spokesperson from Amundi said: “The fiduciary duty and regulatory obligation in passive management is to replicate as closely as possible an index – whether it is ESG or not – which is based on a methodology designed by an index provider. Therefore, the portfolio manager has to meet the contractual objectives to deliver a passive exposure in line with the index it replicates.
“As a result, the portfolio manager may have to invest and/or stay invested in securities comprised in the index, even if an issuer has a negative impact on the environment or society. Should it be the case, for listed corporates, Amundi will vote, in line with its responsible investment policy, against the discharge of the board or management, the re-election of the chairman and certain directors.
“We also engage on a regular basis with our index counterparties to share our views and concerns and encourage them to reassess their methodologies.
“Amundi has the largest Responsible ETF range in the European market covering equity and fixed income and with different methodologies and levels of ESG integration to meet the variety of clients’ needs. This range has been constantly strengthened over the past few years with the objective that 40% of the total UCITS ETF range will be comprised of ESG ETF by end 2025.”
